You've spent hours and hours looking at potential investment houses or even for your primary residence. You've found the perfect property and had your offer accepted. Submitting the required paperwork for the mortgage seems to have included documenting when you first started putting coins in a piggy bank as a child. You've laid out over a $1,000 to have an appraisal and inspection completed. Finally, your loan officer calls to say your loan is fully approved. But that doesn't mean it's funded yet and there are still things that can go wrong. It's more than your credit score that goes into the loan approval equation.
You're very excited and tell all of your family and friends that your deal is ready to close. You've either scheduled the movers or started developing marketing materials to find a tenant. In your mind, everything is in place to close the deal and move on to the next phase of your life. Then you get another call from the loan officer saying they won't be funding the deal after all.
Even after getting the final approval, you're not going to get the loan. Your first thought is that the banks word isn't any good. After all, isn't a deal a deal? Why is it that one minute it's good to go and the next there's no longer a deal? You ask the loan officer if there is some way to put the deal back together and why it fell apart at the last minute?
The industry doesn't keep formal statistics on deals that are approved but then don't close. However, these 11th hour disapprovals happen more often than many people realize. What too many people don't know is that losing the loan at the last moment is almost always preventable and possibly fixable.
The most common error people make after their loan is approved but before funding is completed, is taking out additional credit after the lender has reviewed your credit report. If your income to debt ratio was close during the initial documentation review, taking on more debt will likely push you into a debt ratio the bank deems unacceptable. Even if debt ratio wasn't close, a large loan can trip the disproval (a car loan or another real estate investment).
Most lenders have credit monitoring systems that pick up any new credit accounts that you open or any additional debit you add to existing accounts. Adding debt for a co-applicant that had a middle of the road credit score can lower that score enough to trigger a higher interest rate. If it was a borderline score, it can result in the loan being denied. Everything is automated today, the lender has no trouble finding these issues.
You may have really needed a lawn mower and all the tools needed to maintain your first yard. The bottom line is don't buy these on credit. Wait until the deal has completely closed before taking on any new debt. Your normal purchase of gas and a night at the movies isn't likely to cause any problems. It's a major purchases or opening new accounts that will get your loan denied.
Another one that can happen but is often fixable is the lender learns an addition has been made to the house without the required permits being issued. If this happens, you might be able to get the local authorities to inspect the addition and issue the necessary permits.
Changing jobs mid loan process may or may not be repairable. This happens when you or a co-applicant change jobs during the loan funding process. Lenders almost always reverify your employment shortly before the loan is going to be funded. If anyone that submitted financial documentation for your loan is planning to change employers or stop working, it's best to wait until after the loan closes. And be on your best behavior so that you don't get fired.
Much more rare but a possibility is that the private mortgage insurance provider declines the loan. They can interpret the loan documentation differently from the lender. Fortunately, it's usually possible to recover from this problem by applying to a different insurance provider.
One that is never recoverable from is if you submit fraudulent income statements. In today's world, there are no undocumented income statements. The lender will validate your income statement with the IRS or other taxing authorities. What you submit to the lender must be exactly what you submitted to the tax authorities. Often the original loan approval is based on a contingency that your income be validated by the IRS.
Between the time you are approved and when the deal closes, try to keep everything the same regarding your financial situation.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.